How the case against BP propane traders went wrong

How case against BP traders went wrong

TOM FOWLER, Copyright 2009 Houston Chronicle |
September 18, 2009

When federal investigators alleged in 2006 that a group of BP propane traders tried to manipulate that market, it seemed like a strong case.

There was the clear spike in propane prices at the time of the alleged manipulation in 2004.

There were the taped phone conversations between some of the traders discussing the scheme, including one in which a trader notes how “… we could control the market at will.”

One trader even pleaded guilty. BP entered into a deferred prosecution agreement with the government and paid $303 million in fines, including $53 million to reimburse customer losses.

But on Thursday, U.S. District Judge Gray Miller threw the indictments out, saying the law used in the indictments didn't prohibit BP's transactions.

How could a case that seemed to some like such a slam-dunk end up back at square one?

Defense attorneys involved in the case say that in addition to government's flawed legal theory, the transaction wasn't the nefarious plot by ‘Big Oil' that prosecutors claimed.

According to court filings, BP traders bought as much propane as possible in the Mont Belvieu storage fields in Chambers County that would be shipped over a particular pipeline to points as far north as Chicago and New York. Within that month they bought nearly 90 percent of that propane.

The plan was to hold on to the fuel until the final days of the month when other businesses that were “short” of propane and needed it to meet obligations would be clamoring to purchase. At that point, BP could raise the price since those buyers would have no other options.

Investigators say BP did just that in the closing days of February 2004. But the transaction didn't play out as BP had hoped, with the company losing about $10 million.

Setback in venue change

It's also unclear who the victims of the scheme were, or if there were any, beyond a few other large market participants who were betting prices would do something different.

The price spike didn't appear beyond the single trading hub, according to Energy Information Administration data, meaning it may not have affected any retail customers.

Because wholesale and retail distributors usually have several days of inventory on hand, they could simply have chosen not to buy propane when the prices were higher.

After more than a year, none of the $53 million BP had to pay for restitution has been distributed to victims, according to a Department of Justice spokesman. The application deadline for the funds has been extended twice and the criteria for victims to apply were broadened in an effort to attract applications.

The government case suffered a setback last year when, to the surprise of many, a defense motion for a change of venue was granted, moving the case from Chicago to Houston.

‘A foolish indictment'

The defense was also helped by deep pockets — namely BP's. The company continued to pay the legal fees of the four traders' attorneys, allowing them to put up an aggressive challenge.

But ultimately the case came down to the argument defense attorneys made to the government even before their clients were indicted ­— that the transactions were exempt under the Commodity Exchange Act. The judge agreed but noted he was sympathetic to the government's efforts to discourage the manipulative behavior alleged.